Prepare to Disclose: California Legislature Declines to Extend AB 1305 Voluntary Carbon Market Disclosure Deadline, Leaves Existing SB 253 and SB 261 Climate Disclosure Timelines in Place

Last year, California passed three first-in-the-nation climate laws imposing disclosure obligations on thousands of companies with a presence in California. In October of 2023, California signed into law AB 1305, requiring companies to make disclosures surrounding net-zero, carbon neutrality, and significant emissions reduction claims and their use of voluntary carbon offsets; SB 253, requiring companies to disclose their greenhouse gas emissions; and SB 261, obligating companies to prepare biennial risk reports that publicly disclose climate-related financial risks and mitigation measures. The trio of laws caused concern among regulated companies and regulators, given the short amount of time allowed to gather and report the data required and several perceived ambiguities in the laws.

To address these concerns, legislators and the Newsom administration headed into the summer 2024 legislative session expecting to amend these statutes to narrow their requirements and extend compliance timelines. However, when the summer session closed on August 31, 2024, the California legislature declined to amend or clarify disclosure requirements for any of the three bills due to a lack of broad support from the California Air Resources Board (CARB) and the governor’s office.[1] Regulated entities should now prepare for compliance according to the bills’ the original timelines and obligations. The compliance deadline for each is discussed below.

AB 1305 Voluntary Carbon Market Disclosures Business Regulation Act

The California legislature failed to pass AB 2331, a bill meant to amend AB 1305, the Voluntary Carbon Market Disclosures Business Regulation Act, by the end of the legislative session on August 31, 2024. AB 2331 was intended to be a “clean-up” bill that would have delayed enforcement of AB 1305 until July 1, 2025 and clarified several ambiguities in the existing statute. Despite broad legislative support, AB 2331 failed to pass before the close of the legislative session. Unless and until another amending bill is introduced in the January 2025 legislative session, regulated entities must comply with the current statutory disclosure requirements[2] by January 1, 2025. For more information on AB 1305’s disclosure requirements, read MoFo’s previous client alert on AB 1305.

As originally enacted, the text of AB 1305 gave covered companies less than three months to evaluate their disclosures and come into compliance; it was signed into law on October 7, 2023 and became effective on January 1, 2024. Given the short timeframe and ambiguities in the law’s requirements, AB 1305 spurred confusion regarding the deadline for the first set of disclosures and the scope of claims covered by the law.

In late 2023, AB 1305’s author, Assemblymember Jesse Gabriel, wrote a letter to the Chief Clerk of the California Assembly clarifying his intent that the first disclosures be posted by January 1, 2025. As a result of the letter, it was widely understood that AB 1305 enforcement would be deferred until 2025. In response, the state legislature introduced AB 2331 in February 2024, proposing several amendments to AB 1305 to clarify the enforcement deadline and other features of the law. The failure of AB 2331, however, leaves several significant ambiguities in AB 1305:

Compliance Deadline: In the immediate aftermath of the legislature passing AB 1305, covered entities had a number of questions surrounding enforcement. Were initial disclosures due on the date the law became effective? Did the disclosure requirement apply to climate-related claims made before the effective date? The date change would have answered both questions clearly and further provided covered entities with additional time to prepared the required disclosures. Given AB 2331’s failure, and Assemblymember Gabriel’s earlier statement of legislative intent, companies should now assume that enforcement will begin as early as January 1, 2025, and prepare their disclosures accordingly.

Applicability to RECs: As introduced, AB 2331 would have specifically excluded Renewable Energy Certificates (RECs) from the definition of “voluntary carbon offset” to resolve ambiguity in the law about whether RECs come within the scope of AB 1305. The Senate struck the exclusion in the days before the final voting deadline without providing an explanation in the Floor Analysis records, which may be one sticking point that prevented AB 2331 from ultimately passing. Though RECs and offsets are distinct and different instruments, whether AB 1305 requires disclosures around RECs remains unclear.

Acceptability of Disclosures Made by Reference: AB 2331 also would have amended AB 1305 to clarify that a purchaser, marketer, or reseller of voluntary carbon offsets may satisfy AB 1305’s requirements by directing viewers to compliant disclosures made by the registry or business entity that generated the offsets and is better positioned to make the disclosure. The attempt to amend AB 1305 to explicitly approve of disclosure by reference may indicate legislative intent that such disclosures satisfy the law’s requirements. It is unclear, however, whether regulators will take a similar stance when enforcing AB 1305 as the law reads currently. Either way, entities opting to make disclosures by reference should ensure the source disclosures are AB 1305-compliant.

AB 2331 would also have removed the requirements for marketers and sellers of voluntary carbon offsets to disclose the durability period of offset projects and for companies making net-zero, carbon neutral, or significant emissions reductions claims to disclose how interim progress toward their goals is being measured.[3] While a future amendment to AB 1305 may reintroduce these changes, for now, regulated entities must comply and prepare durability and interim progress disclosures, as applicable.

Read the full text of AB 2331.

For more information on AB 1305, see MoFo’s previous deep dive on the law’s requirements and implications.

SB 253 Climate Corporate Accountability Act and SB 261 Greenhouse Gases: Climate-Related Financial Risk

During the summer of 2024, the Newsom administration also urged the legislature to delay enforcement of California’s other two nation-leading climate disclosure laws, SB 253 and SB 261, which require covered entities to report their greenhouse gas emissions starting in 2025 and climate-related financial risk in 2026, respectively. A detailed discussion of both of these bills can be found in our October 2023 client alert. The legislature declined to adopt the governor’s proposed timeline shift but did pass SB 219, amending SB 253 to push back CARB’s deadline to develop regulations under the law by six months, to July 1, 2025.

Although the legislature declined to amend disclosure obligations under the laws, the future of SB 253 and SB 261 remains uncertain. Both bills are currently the subject of litigation in the U.S. District Court for the Central District of California, with the U.S. Chamber of Commerce, California Chamber of Commerce, American Farm Bureau Federation, and other industry groups seeking a declaratory judgment that the two bills are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and run afoul of the U.S Constitution’s Commerce Clause. CARB filed a motion to dismiss the claims regarding the Supremacy Clause and extraterritorial regulation, and the plaintiffs also filed a motion for summary judgment on the First Amendment claims, which CARB separately moved to deny or defer to allow time for certain discovery if the court does not deny the motion for summary judgment outright. All three motions are set for hearings on October 15, 2024. If successful, this lawsuit could dramatically alter, or eliminate, companies’ obligations to report their greenhouse gas emissions and climate-related financial risk. MoFo is following these developments closely.

Our team of environmental and ESG attorneys is at the forefront of advising clients on compliance with AB 1305 and other state, federal, and international climate disclosure laws. We are actively monitoring this rapidly evolving regulatory landscape and regularly assist companies with developing and auditing climate and sustainability disclosures that meet a range of regulatory standards.

[1] Per MoFo’s conversations with Assemblymember Gabriel’s office regarding AB 2331.

[2] See Cal. Health & Safety Code §§ 44475.1, 4475.2 (2024).

[3] Durability Period: The “durability” of carbon offsets, the planned duration of carbon storage, is a challenging topic in the carbon offset world. The field has yet to standardize how it describes and compares the climate benefits of storing carbon in different forms and for different periods of time. Further, predictions regarding how long carbon will be stored are necessarily contingent; any number of events (for example, a wildfire burning down trees that were planted as part of an offset project) could cause carbon to be re-released into the atmosphere and render an offset credit meaningless. AB 2331 would have removed the requirement for voluntary carbon offset marketers and sellers to disclose the durability period, and instead shifted the focus to monitoring for reversals and plans for compensating for any re-released carbon, allowing consumers to more accurately judge the quality of offsets.

Interim Progress: Finally, AB 2331 would have removed the requirement for companies making net-zero, carbon neutral, or significant emissions reductions claims about a company or a product to report how interim progress toward such a goal is being measured. The requirement to report on interim progress toward net-zero, carbon neutral, or significant emissions reductions claims was designed to ensure that companies making such claims were actually progressing toward their stated goals. The removal of this requirement would have significantly reduced the burden of complying with AB 1305. While companies would still have had to update their disclosures annually, they would have no longer needed to collect data on goal progress. Because AB 1305 remains in place unamended, companies making claims about future net-zero carbon neutral goals should continue measuring and disclosing interim progress.